Stalking Horse Not Wanted: U.S. Shipping Rebuffs Bid, But Why?

If you were a company with increasing year-over-year losses in the midst of a recession, would you choose to emerge from bankruptcy with 9.1x leverage or with 3x leverage?

Might not sound like much of a choice, but that’s because you’re not U.S. Shipping Partners, the long-haul marine transportation business once bestowed with the cursed Buyouts Deal of the Year Award. The company, which filed for bankruptcy in May, has actually chosen the 9.1x leverage option. Former owner Sterling Investment Partners lost its entire $40 million equity investment and has removed itself from the situation entirely.

The company’s fate was decided by a steering committee made up of three hedge funds which are senior lenders to the company: Stone Tower Capital, Zimmer Lucas Capital and Par IV Capital Management.

The steering committee got the rest of the company’s lenders to agree to a Plan Support Agreement in April, which certifies that the lenders will vote in favor of their plan to emerge from bankruptcy. That plan includes keeping all existing debt facilities in place to the tune of 9.1x leverage. This way lenders can avoid any write downs and continue to earn their interest on the debt, which matures in 2013. Despite the massive leverage and the question of whether hedge fund-lenders are qualified to run companies, all was well and good, with the company set to emerge from bankruptcy in October.

Then Rand Logistics (Nasdaq: ROLG) proposed to purchase the company for $225 million, with an additional $30 million in common equity. Rand Logistics was originally a SPAC that purchased Lower Lakes Towing in 2006. The company’s deal for U.S. Shipping would retire 75% of the company’s debt upon completion, but the Steering Committee rejected the proposal because it was viewed as “non-binding” and “highly speculative.”

On Thursday, Rand Logistics responded to the letter in disagreement. The company’s reply, filed in an 8-K with the SEC, mentioned another strategic buyer had also expressed interest in U.S. Shipping and requested that both suitors be allowed to conduct due diligence.

Unfortunately it seems that angry letters are all Rand Logistics can do that this point. Even some lenders to the company have expressed regret over signing the Plan of Support agreement once the Rand Logistics offer emerged, according to a source familiar with the situation. The only body that can break it is the Steering Committee, and its members seem to think the company can pull through its rough patch, leverage be damned.